We find that each cent-per-gallon increase in the price of gasoline reduces the equilibrium gasoline consumption by about .2 percent. Impacts on the used car market change significantly over time. Taking account of revenue-recycling, the impact of a 25-cent gasoline tax increase on the average household is about $30 per year (2001 dollars).
Distributional impacts depend importantly on how additional revenues from the tax increase are recycled. If revenues are recycled in equal amounts to each household, the average household in each of the bottom four income deciles experiences a welfare gain from a gasoline tax increase. On the other hand, if revenues are recycled in proportion to income, only very poor households (those in the lowest decile) and very rich households (those in the highest) stand to gain.